Ubiquiti Networks Reports Third Quarter Fiscal 2019 Financial Results

Ubiquiti Networks, Inc. (NASDAQ: UBNT) (“Ubiquiti” or the “Company”)
today announced results for the third quarter fiscal 2019, ended
March 31, 2019.

Third Quarter Fiscal 2019 Financial Highlights

• Revenues of $284.9 million, increasing 13.8% year-over-year
• GAAP net income of $88.3 million and GAAP diluted EPS of $1.25
• Non-GAAP net income of $88.9 million and non-GAAP diluted EPS of
  $1.26, increasing 28.6% year-over-year

Additional Highlights

• The Company repurchased and retired 91,249 shares of common stock for
  $9.0 million at an average price of $98.63 per share during the third
  quarter fiscal 2019.
• The Company has $178.2 million of availability remaining under the
  $200 million share repurchase program announced on November 9, 2018.
• The Company’s Board of Directors declared a $0.25 per share cash
  dividend payable on May 28, 2019 to shareholders of record at the
  close of business on May 20, 2019.

Income Statement Items

Revenues

Revenues for the third quarter fiscal 2019 were $284.9 million,
representing a decrease from the prior quarter of 7.3% and an increase
from the comparable prior year period of 13.8%. Revenues for the first
nine months of fiscal 2019 were $875.1 million, representing an increase
of 17.1% from the first nine months of fiscal 2018.

We believe the sequential decline in revenues for the third quarter
fiscal 2019 is primarily due to distributor ordering patterns and as
described in the “Outlook” section below, we expect to achieve revenues
for the fiscal year ending June 30, 2019 at the high end of the guidance
range previously provided.

Gross Margins

During the third quarter fiscal 2019, GAAP gross profit was $132.8
million. GAAP gross margin of 46.6% increased 0.9% versus the comparable
prior year period GAAP gross margin of 45.7% and increased 1.0% versus
the prior quarter GAAP gross margin of 45.6%.

The increase in gross margin as a percentage of revenue for the third
quarter fiscal 2019 as compared to the comparable prior year period was
driven by the mix of products sold and offset, in part, by higher
indirect expenses. The increase in gross margin as a percentage of
revenue for the third quarter fiscal 2019 as compared to the second
quarter fiscal 2019 was driven by the mix of products sold and lower
indirect expenses.

We expect to incur costs as a result of tariffs on certain products
imported into the U.S. from China. However, we anticipate mitigating the
effect of the tariffs in the long-term and therefore our long-term gross
margins are expected to remain between 45% to 50%

Research and Development

During the third quarter fiscal 2019, research and development (R&D)
expenses were $21.3 million. This reflects an increase as compared to
the R&D expenses of $17.4 million in the comparable prior year period
and R&D expense of $20.0 million in the prior quarter.

Increased costs in third quarter fiscal 2019 as compared to both the
prior year period and prior quarter is primarily driven by higher
employee-related expenses. R&D expenses represented 7.5% of revenues in
the third quarter fiscal 2019, which is in line with the Company’s
target model range of 6% to 8%.

Sales, General and Administrative

The Company’s sales, general and administrative (“SG&A”) expenses for
the third quarter fiscal 2019 were $9.4 million. This reflects a
decrease as compared to the SG&A expenses of $12.2 million in the
comparable prior year period and SG&A expenses of $10.6 million in the
prior quarter. The decrease in SG&A costs as compared to the prior year
period was primarily related to lower professional fees and lower
employer payroll taxes associated with tax withholding related to
settlement of equity awards recorded in the third quarter fiscal 2018.
The decrease in SG&A costs as compared to the prior quarter was
primarily related to lower professional fees.

SG&A expenses represented 3.3% of revenues in the third quarter fiscal
2019, which is in line with the Company’s target model range of 3% to 5%.

Taxes

The GAAP effective tax rate was 11.4% for the nine months ended
March 31, 2019. For long-term planning purposes, we assume a target
effective tax rate of 11% to 14%.

Net Income and Earnings Per Share

During the third quarter fiscal 2019, GAAP net income was $88.3 million
and non-GAAP net income was $88.9 million. This reflects an increase in
non-GAAP net income from the comparable prior year period by 16.9%,
primarily driven by a 13.8% increase in revenues and a higher gross
margin.

During the third quarter fiscal 2019, GAAP earnings per diluted share
were $1.25 and non-GAAP earnings per diluted share were $1.26. This
reflects an increase in non-GAAP earnings per diluted share from the
comparable prior year period by 28.6%, primarily driven by higher
non-GAAP net income and a reduction in non-GAAP diluted shares
outstanding.

Balance Sheet Items

Cash and Investments

Total cash and cash equivalents were $310.3 million as of March 31, 2019
compared with $666.7 million as of June 30, 2018. In addition, as of
March 31, 2019, we held $102.0 million in available-for-sale securities.
During the third quarter fiscal 2019, the Company repurchased 91,249
shares of common stock for $9.0 million at an average price of $98.63
per share.

DSOs

This quarter the Company experienced a decline in days sales outstanding
(DSOs) in accounts receivable of 51 days, as compared with 52 days in
the second quarter fiscal 2019.

Inventory

Finished goods inventory as of March 31, 2019 was $276.7 million,
representing an increase of $25.0 million from December 31, 2018 and an
increase of $180.0 million from June 30, 2018. Finished goods inventory
increased during both periods due to increased production of inventory
to satisfy expected demand for our products. We expect to manage our
finished goods inventory to meet demand, reduce lead times and secure
supply.

Cash Flow Statement Items

The Company’s net cash flow from operations for the nine months ended
March 31, 2019 was $158.3 million, compared with a net cash flow from
operations of $285.1 million for the comparable prior year period. The
$126.9 million decrease in operating cash flow for the nine months ended
March 31, 2019 as compared with the comparable prior year period was
primarily driven by the net impact of increased inventory and the
corresponding payables, partially offset by higher net income. For the
nine months ended March 31, 2019, the Company used $400.7 million of
cash for financing activities, which was driven by $328.1 million in
stock repurchases and $53.8 million in cash dividend payments.

Outlook

Based on recent business trends, the Company expects to achieve results
at the high end of the guidance range previously provided for the full
fiscal year ending June 30, 2019.

About Ubiquiti Networks

Ubiquiti Networks is focused on democratizing network technology on a
global scale — aggregate shipments of nearly 85 million devices play a
key role in creating networking infrastructure in over 200 countries and
territories around the world. Our professional networking products are
powered by our UNMS and UniFi software platforms to provide
high-capacity distributed Internet access and unified information
technology management, respectively.

Ubiquiti and the U logo are trademarks or registered trademarks of
Ubiquiti and/or its affiliates in the United States and other countries.
For more information, please visit www.ui.com.

Safe Harbor for Forward Looking Statements

Certain statements in this press release are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Statements other than statements of historical fact including
words such as “look”, “will”, “anticipate”, “believe”, “estimate”,
“expect”, “forecast”, “consider” and “plan” and statements in the future
tense are forward looking statements. The statements in this press
release that could be deemed forward-looking statements include
statements regarding expectations for financial results for the full
fiscal year 2019, and statements regarding expectations of the impact of
tariffs, expected impact of taxes on our liquidity and results of
operations, our cash position, expenses, DSOs, number of distributors
and resellers, shipments, the introduction of new consumer products,
Gross Margins, R&D, SG&A, tax rates, inventory turns, growth
opportunities, demand and long term global environment for our products,
new products, and financial performance estimates including revenues and
GAAP diluted EPS for the Company’s full fiscal year 2019, and any
statements or assumptions underlying any of the foregoing.

Forward-looking statements are subject to certain risks and
uncertainties that could cause our actual future results to differ
materially or cause a material adverse impact on our results. Potential
risks and uncertainties include, but are not limited to, the impact of
U.S. tariffs on results, fluctuations in our operating results; varying
demand for our products due to the financial and operating condition of
our distributors and their customers, and distributors’ inventory
management practices; political and economic conditions and volatility
affecting the stability of business environments, economic growth,
currency values, commodity prices and other factors that may influence
the ultimate demand for our products in particular geographies or
globally; impact of counterfeiting and our ability to contain such
impact; our reliance on a limited number of distributors; inability of
our contract manufacturers and suppliers to meet our demand; our
dependence on Qualcomm Atheros for chipsets without a short-term
alternative; as we move into new markets competition from certain of our
current or potential competitors who may be more established in such
markets; our ability to keep pace with technological and market
developments; success and timing of new product introductions by us and
the performance of our products generally; our ability to effectively
manage the significant increase in our transactional sales volumes; we
may become subject to warranty claims, product liability and product
recalls; that a substantial majority of our sales are into countries
outside the United States and we are subject to numerous U.S. export
control and economic sanctions laws; costs related to responding to
government inquiries related to regulatory compliance; our reliance on
the Ubiquiti Community; our reliance on certain key members of our
management team, including our founder and chief executive officer,
Robert J. Pera; adverse tax-related matters such as tax audits, changes
in our effective tax rate or new tax legislative proposals; whether the
final determination of our income tax liability may be materially
different from our income tax provisions; the impact of any intellectual
property litigation and claims for indemnification; litigation related
to U.S. Securities laws; and economic and political conditions in the
United States and abroad. We discuss these risks in greater detail under
the heading “Risk Factors” and elsewhere in our Annual Report on Form
10-K for the year ended June 30, 2018, and subsequent filings filed with
the U.S. Securities and Exchange Commission (the “SEC”), which are
available at the SEC’s website at www.sec.gov.
Copies may also be obtained by contacting the Ubiquiti Networks Investor
Relations Department, by email at IR@ubnt.com
or by visiting the Investor Relations section of the Ubiquiti Networks
website, http://ir.ui.com.

Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Also, forward-looking statements represent
our management’s beliefs and assumptions only as of the date made.
Except as required by law, Ubiquiti Networks undertakes no obligation to
update information contained herein. You should review our SEC filings
carefully and with the understanding that our actual future results may
be materially different from what we expect.

Use of Non-GAAP Financial Information

To supplement our condensed consolidated financial results prepared
under generally accepted accounting principles, or GAAP, we use non-GAAP
measures of net income and earnings per diluted share that are adjusted
to exclude certain costs, expenses and gains such as stock-based
compensation expense, net tax benefits related to equity awards
exercises and vesting, unusual litigation settlements, SEC related
matters, Tax Reform Transition Tax and the tax effects of these non-GAAP
adjustments.

Reconciliations of the adjustments to GAAP results for the periods
presented are provided above. In addition, an explanation of the ways in
which management uses non-GAAP financial information to evaluate its
business, the substance behind management’s decision to use this
non-GAAP financial information, material limitations associated with the
use of non-GAAP financial information, the manner in which management
compensates for those limitations, and the substantive reasons
management believes that this non-GAAP financial information provides
useful information to investors is included under the paragraphs below.

A reconciliation of non-GAAP guidance measures to corresponding GAAP
measures is not available on a forward-looking basis due to the high
variability and low visibility with respect to the charges which are
excluded from these non-GAAP measures. For example, share-based
compensation expense is impacted by the Company’s future price at which
the Company’s stock will trade in those future periods. The items that
are being excluded are difficult to predict and a reconciliation could
result in disclosure that would be imprecise or potentially misleading.
Material changes to any one of these items could have a significant
effect on our guidance and future GAAP results. Certain exclusions, such
as share-based compensation expenses, are generally incurred each
quarter, but the amounts have historically and may continue to vary
significantly from quarter to quarter.

Usefulness of Non-GAAP Financial Information to
Investors

We believe that the presentation of non-GAAP net income and non-GAAP
earnings per diluted share provides important supplemental information
regarding non-cash expenses, significant items that we believe are
important to understanding our financial, and business trends relating
to our financial condition and results of operations. Non-GAAP net
income and non-GAAP earnings per diluted share are among the primary
indicators used by management as a basis for planning and forecasting
future periods and by management and our board of directors to determine
whether our operating performance has met specified targets and
thresholds. Management uses non-GAAP net income and non-GAAP earnings
per diluted share when evaluating operating performance because it
believes that the exclusion of the items described below, for which the
amounts or timing may vary significantly depending upon the Company’s
activities and other factors, facilitates comparability of the Company’s
operating performance from period to period. We have chosen to provide
this information to investors so they can analyze our operating results
in the same way that management does and use this information in their
assessment of our business and the valuation of our Company.

About our Non-GAAP Net Income and Non-GAAP
Earnings per Diluted Share

We compute non-GAAP net income and non-GAAP earnings per diluted share
by adjusting GAAP net income and GAAP earnings per diluted share to
remove the impact of certain adjustments and the tax effect of those
adjustments. Items excluded from net income are:

• Stock-based compensation expense
• Net Tax Benefits related to Equity Awards Exercises and Vesting
• Litigation settlement
• Tax Reform Transition Tax
• SEC Related matters
• Tax effect of non-GAAP adjustments, applying the principles of ASC 740

These non-GAAP measures are not in accordance with, or an alternative
to, GAAP and may be materially different from other non-GAAP measures,
including similarly titled non-GAAP measures used by other companies.
The presentation of this additional information should not be considered
in isolation from, as a substitute for, or superior to, net income or
earnings per diluted share prepared in accordance with GAAP. Non-GAAP
financial measures have limitations in that they do not reflect certain
items that may have a material impact upon our reported financial
results.

For more information on the non-GAAP adjustments, please see the table
captioned “Reconciliation of GAAP Net Income to Non-GAAP Net Income”
included in this press release.

(1) Derived from audited consolidated financial statements as of and
for the fiscal year ended June 30, 2018.

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